Inside IR35 Meaning 2026/27: 3 Status Tests + What It Costs You
What "inside IR35" means in 2026/27 - the employment status tests, who decides under Chapter 8 or Chapter 10, and a worked take-home comparison.
What "inside IR35" actually means
"Inside IR35" means the intermediaries rules apply to an engagement: you would have been an employee of the end-client if you had been engaged directly rather than through your Personal Service Company (PSC). The rules are in the Income Tax (Earnings and Pensions) Act 2003, Part 2: Chapter 8 (since April 2000) and Chapter 10, the off-payroll working rules (public sector since April 2017, medium and large private and voluntary sector clients since April 2021).
If your engagement is inside IR35, the income is taxed broadly as employment income regardless of the PSC. Under Chapter 10 the client decides status and the fee-payer (the client or an agency) deducts Income Tax and employee National Insurance, and pays employer National Insurance, before paying your PSC. Under Chapter 8 (small private-sector clients, and clients wholly outside the UK) your PSC decides and works out a "deemed employment payment" at the end of the tax year (GOV.UK). Either way you lose the salary-and-dividend route, but you do not gain employment rights from the client.
"Outside IR35" means the rules do not apply to that engagement, and your PSC can pay you through salary and dividends. Status is decided by the employment status case law described below.
The main employment status tests
The leading framework comes from the Ready Mixed Concrete case (1968). HMRC's manual treats the Supreme Court's 2024 PGMOL judgment as the leading authority on its first stage (HMRC ESM0543).
1. Personal service and mutuality of obligation
The worker agrees to provide their own work or skill in return for pay - the "work for pay" bargain. In PGMOL the Supreme Court held that this can exist within a single engagement, even where nobody is obliged to offer or accept further work, and that a right for either side to cancel before the work starts does not remove it. A genuine right to send a substitute, which is actually workable, points against employment because the client is then not getting the worker's personal service.
2. Control
Whether the client has a sufficient right to control how, when and where the work is done. What matters is the right to control, not only whether it is exercised day to day. A specialist doing work the client could not direct in technical detail can still be under the client's control in other respects.
3. The wider picture
If either of the first two is missing there is no employment. If both are present, everything else is weighed: financial risk, who provides equipment, the chance to profit from managing the work well, working for other clients, and whether you are treated as part of the client's organisation. No single factor settles it.
Worked income comparison - the cost of inside IR35
Contractor on £500/day × 220 chargeable days/year = £110,000 of fees, England, 2026/27 rates. Both columns start from the same fees. The inside column assumes the fee-payer's total cost is held at those fees, so employer National Insurance comes out of them; under the Chapter 10 off-payroll rules HMRC says employer NI is paid on top of the deemed direct payment (HMRC fee-payer guidance), and if it is, inside take-home is about £72,357. The inside column is also before any umbrella company margin, if the engagement runs through an umbrella.
| Component | Outside IR35 (PSC route) | Inside IR35 (Chapter 10) |
|---|---|---|
| Fees | £110,000 | £110,000 |
| Company running costs (assumed) | (£2,500) | not modelled |
| Employer National Insurance | ~(£1,136) on the director's salary (no Employment Allowance for a sole-director company) | ~(£13,696) (15% above £5,000) |
| Salary / deemed payment | £12,570 salary | ~£96,304 deemed direct payment |
| Corporation Tax / Income Tax | ~£21,106 Corporation Tax (19% to 25%, marginal relief between) | ~£25,954 Income Tax (20% / 40%) |
| Dividend tax | ~£16,508 (10.75% / 35.75%) | n/a |
| Employee National Insurance | £0 (salary at the Primary Threshold; none on dividends) | ~£3,937 (8% then 2%) |
| Net to contractor | ~£68,751 | ~£66,414 |
| Difference | ~£2,338 less take-home inside IR35 | |
The gap runs in favour of outside IR35 at these fees, and it is narrower than often quoted, because the 2026/27 dividend rates and the Corporation Tax marginal band reduce what the company route keeps, while the employer National Insurance taken out of the £110,000 (the like-for-like assumption above) reduces the inside figure. The comparison leaves out Apprenticeship Levy, umbrella fees and pension contributions, any of which can move the answer by hundreds or thousands of pounds.
Chapter 8 vs Chapter 10 framework
| Feature | Chapter 8 (original IR35) | Chapter 10 (off-payroll) |
|---|---|---|
| Status determination | PSC decides | Client decides and issues a status determination statement |
| When it applies | Small private-sector clients; clients wholly outside the UK | Public sector; medium and large private and voluntary sector clients |
| Effective date | April 2000 | April 2017 public / April 2021 private |
| Tax collection | PSC accounts for PAYE and NI on the deemed payment | Fee-payer deducts at source and pays employer NI |
| 5% deduction | Yes, step 1 of ITEPA 2003 s.54 | Not part of the Chapter 10 calculation |
| Who is liable if it is wrong | The PSC | The fee-payer, or the client if it did not take reasonable care |
Small client test: for financial years beginning on or after 6 April 2025, a company client is medium or large if it meets two or more of these for two consecutive financial years - turnover over £15 million, balance sheet total over £7.5 million, more than 50 employees. Before that the turnover and balance sheet limits were £10.2 million and £5.1 million (HMRC ESM10006a). HMRC says the earliest tax year the new limits can affect a client is 2027/28, so for 2026/27 engagements the £10.2 million and £5.1 million limits still decide whether the client is small.
Related calculators and guides
- IR35 deemed payment calculator - Chapter 8 deemed payment computation for small-client contracts.
- Contractor calculator - outside-IR35 PSC take-home computation with salary+dividend extraction.
- Dividend tax calculator - dividend extraction tax for outside-IR35 PSC contractors.
- Sole trader vs Limited Company guide - structural choice that interacts with IR35 status.
- DevOps engineer pay - a role often filled by contractors.
- Software engineer pay - another role often filled by contractors.
- Employee share schemes - alternative compensation route for permanent roles.
Frequently asked questions
What does "inside IR35" mean?
"Inside IR35" means the intermediaries rules in ITEPA 2003 (Part 2, Chapter 8 or Chapter 10) apply to an engagement: the worker would have been an employee of the client if they had been engaged directly rather than through their own limited company (personal service company, or PSC). The income is then taxed broadly as employment income, through PAYE and Class 1 National Insurance, instead of being taken from the company as salary and dividends. "Outside IR35" means the rules do not apply to that engagement. Whether they apply depends on the same employment status tests the courts use for anyone: mainly personal service, mutuality of obligation and control, looked at alongside the rest of the contract and working arrangements.
What are the 3 main IR35 status tests?
The starting point is the Ready Mixed Concrete case (1968), which HMRC applies as the leading framework (HMRC ESM0543). Personal service and mutuality of obligation: the worker agrees to provide their own work or skill in return for pay. The Supreme Court in PGMOL (2024) treated this "work for pay" bargain as the basic requirement, and held it can exist within a single engagement even where there is no obligation to offer or accept further work. A genuine right to send a substitute points away from employment. Control: the client has a sufficient right to control how, when and where the work is done. If either of these is absent there is no employment; if both are present, the other terms of the contract and the working arrangements (financial risk, equipment, being part of the client's organisation, and so on) decide whether the whole picture is consistent with employment.
What is the difference between Chapter 8 and Chapter 10?
Chapter 8 (the original IR35 rules, from April 2000): the worker's PSC decides whether the rules apply. If they do, the PSC works out a "deemed employment payment" at the end of the tax year and accounts for PAYE and National Insurance on it. It now applies where the client is a small business outside the public sector, or is wholly outside the UK. Chapter 10 (off-payroll working: public sector from April 2017, medium and large private and voluntary sector clients from April 2021): the client decides and must give a status determination statement. If the engagement is inside, the fee-payer (the client or an agency) deducts Income Tax and employee National Insurance and pays employer National Insurance on a "deemed direct payment" before paying the PSC (GOV.UK Understanding off-payroll working).
What does the small-company test mean for IR35?
A company client is small for these purposes if it meets the Companies Act 2006 small company conditions (ITEPA 2003 s.60A). For financial years beginning on or after 6 April 2025, a company is medium or large if it meets two or more of these for two consecutive financial years: turnover of more than £15 million, a balance sheet total of more than £7.5 million, more than 50 employees. For earlier financial years the turnover and balance sheet limits were £10.2 million and £5.1 million (HMRC ESM10006a; Companies Act 2006 s.382). The test looks at the client's last financial year whose accounts filing deadline fell before the start of the tax year. Groups are tested together. Public sector clients are always under Chapter 10, whatever their size. HMRC says the earliest tax year the new limits can affect a client is 2027/28, so for 2026/27 engagements the £10.2 million and £5.1 million limits still decide whether the client is small.
How much does inside IR35 cost me as a contractor?
£500/day × 220 days = £110,000. Outside IR35 (PSC): after £2,500 running costs, a £12,570 salary (with £1,136 employer NI, no Employment Allowance), Corporation Tax of £21,106 and dividend tax of £16,508: about £68,751. Inside IR35 (Chapter 10): holding the fee-payer's total cost at £110,000, £13,696 goes on employer NI, leaving a £96,304 deemed payment; after £29,890 Income Tax and employee NI: about £66,414, £2,338 less. HMRC says the fee-payer pays employer NI on top; then inside is about £72,357. Not modelled: Apprenticeship Levy, umbrella fees, Scottish bands.
What is the HMRC CEST tool?
CEST (Check Employment Status for Tax) is HMRC's online tool. You answer questions about the engagement and it gives HMRC's view of whether the worker is employed or self-employed for tax purposes, and whether the off-payroll rules apply. HMRC says it will stand by the result as long as the information given is accurate and in line with its guidance (GOV.UK Check employment status for tax). It is not binding on a tribunal, which decides on the facts and the case law.
How is "deemed payment" calculated under Chapter 8?
ITEPA 2003 s.54 sets out eight steps. In outline: take the PSC's income from inside-IR35 engagements and deduct a flat 5%; add certain payments the worker received from others; deduct expenses the worker could have claimed as an employee, capital allowances an employee could have claimed, and pension contributions the PSC made for the worker; deduct the employer National Insurance the PSC paid and the salary and benefits it already paid the worker; and finally take off the employer National Insurance due on the deemed payment itself. The 5% deduction applies only under Chapter 8 (HMRC ESM8175). Example from our calculator for 2026/27: fees £100,000, no salary, £10,000 employer pension contribution. After the 5% (£5,000) and the pension, £85,000 remains; the deemed payment is £74,565 with £10,435 of employer National Insurance on it. The worker pays about £17,258 Income Tax and £3,502 employee National Insurance, keeping about £53,805, plus the pension contribution. See our IR35 deemed payment calculator.
What is "blanket inside IR35" and is it legal?
Some clients decide that every worker engaged through a PSC is inside IR35, or refuse to engage PSCs at all. Refusing to engage PSCs is a commercial choice. But under Chapter 10 the client must take reasonable care in each status determination, and HMRC lists "determining that every worker who provides their services through an intermediary is caught by the off-payroll working rules without giving any consideration to the specific facts of each individual case" as an example of not taking reasonable care (HMRC ESM10014). If you disagree with a status determination statement, you can use the client-led status disagreement process: the client must respond, with reasons, within 45 days of receiving your representations (ITEPA 2003 s.61T).
What is an umbrella company alternative?
An umbrella company employs you and pays you through PAYE for assignments arranged by an agency. The umbrella is paid an assignment rate and deducts Income Tax, employee and employer National Insurance and its own fee before paying you, so you are an employee of the umbrella with the employment rights that come with that. The agency must give you a key information document showing what the umbrella will deduct. The government introduced new PAYE rules for labour supply chains that include umbrella companies from 6 April 2026, and HMRC warns about tax avoidance and fraud involving some umbrella arrangements (GOV.UK Working through an umbrella company).
How do contractors operate outside IR35 legally?
Status depends on the real arrangements as well as the written contract, so both have to point the same way. Features that point away from employment include a genuine right to send a substitute, freedom over how the work is done, carrying financial risk (for example fixed-price work where you bear the cost of putting mistakes right), using your own equipment, working for several clients and not being treated as part of the client's staff. No single factor decides it. HMRC's CEST tool, or a professional review of the contract and working practices, can help you check.
Does the Employment Rights Act 2025 change worker status for contractors?
No. The Employment Rights Act 2025 received Royal Assent on 18 December 2025 and contains no employment status provision. The three-tier framework (employee, worker, self-employed) is unchanged, and none of the Act's 160 sections collapses it. Single "worker" status was a separate commitment: the government's Next Steps to Make Work Pay (October 2024) listed it under longer-term reforms to be delivered outside the Bill, promising only to "consult on a simpler framework that differentiates between workers and the genuinely self-employed". Keep the two questions apart in any case: IR35 decides your tax status under ITEPA 2003, and as GOV.UK puts it, "a person may have a different employment status in tax law" - an inside-IR35 determination does not by itself make you a worker or an employee for employment rights.